After two months in which even a 50-point move in the Dow Jones Industrial Average was reason for excitement, investors were shaken out of their slumber as central bankers signalled reluctance to extend stimulus and sent US stocks to their worst week since February.
Damage was worst in the final session, when Boston Federal Reserve president Eric Rosengren warned against waiting too long to raise interest rates. Selling built after European Central Bank president Mario Draghi played down the need for more measures to boost growth a day earlier. When it was over, the S&P 500 Index was down 2.3 per cent to 2127.81 on the week, with Friday’s plunge wiping out a slight gain over the first three days.
Among the many beacons of complacency that went dark on Friday was a trading range in the S&P 500 that had stood as the tightest ever recorded, a stretch of calm in which no move took the benchmark index above 2190.15 or below 2157.03 for 40 days.
The gauge closed at a two-month low that sent it below its 50-day moving average for the first time since June, while the CBOE Volatility Index, a measure of price turbulence, climbed above 17 for the first time in 50 sessions.
The end came suddenly for investors who spent the US summer pondering the meaning of improving economic data and its influence on Fed policy. In fed funds futures markets, traders briefly pushed bets for a rate increase this month to 38 per cent. Odds fell to 22 per cent on Wednesday following a string of weaker-than-forecast reports on hiring, manufacturing and services activity.
A selloff such as Friday’s has long been predicted by bears, who saw it as a fitting end to a stretch of unprecedented complacency that lasted most of the summer. It was confirmation to them that however strong economic data may have looked in July and August, gains in global equities are being maintained by central bank intervention.
“There’s no question people have been relaxed for the past month or two,” said John Manley, who helps oversee about $US233 billion as chief equity strategist for Wells Fargo Funds Management in New York. “But the market is now showing some disappointment in recent central bank commentary. They’ve given the market enough of a reason to get nervous again. It certainly has my attention, and I’m clearly not the only one.”
The lockstep moves across assets can be seen in a Credit Suisse Group AG gauge tracking price relationships in equities, credit, currencies and commodities, which sits at the highest since at least 2008. Such an increase in correlations is fodder for sceptics who look at declining US earnings and rising valuations and argue that the only explanation for record highs in US stocks this summer is Fed policy.
The S&P 500’s exit from its historically tight trading range sent the measure of market turbulence known as the VIX soaring. The index rose 46 per cent for the week, its biggest five-day increase since January. At 17.50 as of Friday’s close, the so-called fear gauge has rallied 54 per cent since falling to a two-year low of 11.34 in August.